How Oil Prices Affect Consumer Spending

The price of oil has doubled over the last 12 months reaching almost $140 per barrel last week. How this boom in oil prices may affect global economy and consumer spending?

To answer this question correctly one should try to understand the origin of the current oil shock. Indeed, the present surge in oil prices has been mostly driven by increases in demand from rapidly growing developing countries like China, India, and Brazil. Also, supply problems in Russia, Nigeria and Venezuela have accelerated the rise in energy prices even further. Since the elasticity of supply and demand for oil is almost inexistent, the reduction of crude supply connected with the moderate increase in demand may have caused the surge in the price of barrels. For example, in the past, over periods of less than five years, oil consumption in the OECD dropped by only 2-9% when the price doubled, according to the research published by Gary Becker, an economist at the University of Chicago. Likewise, oil production in countries outside OPEC grew by only 4% every time the price doubled. Yet, over longer periods, consumption dropped by 60% and supply rose by 35%.

In addition, eve though the share of oil in Gross Domestic Product is relatively small, oil price shocks could affect the economy through aggregate demand, particularly consumption. People start spending less on other goods since they need to pay more for energy and gasoline. Moreover, customers may also purchase fewer products that are complementary with oil, like cars. Higher oil prices also raise the cost of production for firms, resulting in lower investment spending. Finally, one the biggest impacts of high energy prices, many times forgotten by economists, is the psychological impact. High oil prices encourage precautionary saving by the consumer and the greater economic uncertainty normally means fewer jobs.

Anna Fedec, analyst@tradingeconomics.com6/10/2008 7:27:26 PM

Recent Releases

Crude Oil Falls
Crude oil fell to a five-month low in New York and Brent oil in London dropped below $100 a barrel as the Saudi Arabian and Venezuelan oil ministers signaled that OPEC will maintain production levels when it meets today in Vienna. Published on 2008-09-09

Oil, Gas Fall as Gulf Hurricane Weakens
Crude oil fell to the lowest in more than four months and natural gas dropped to a low for the year after Hurricane Gustav made landfall as a weaker-than-expected storm, easing concern of major damage to rigs and refineries.Published on 2008-09-01

Oil Rises
Crude oil headed for its biggest weekly gain in almost two months and natural gas rose as producers evacuated rigs before the arrival of Gustav, forecast to be the largest hurricane in the Gulf of Mexico since Katrina. Published on 2008-08-29

Crude Oil Rises a Third Day
Crude Oil rose for a third day on forecasts Tropical Storm Gustav will strengthen as it enters the Gulf of Mexico, home to 26 percent of U.S. production.Published on 2008-08-27

Oil Rallies After Sharp Sell-off
Oil prices rallied modestly on Monday, in what traders called a technical rebound after the sharp sell-off at the close of last week.Published on 2008-08-25

Gold Prices Fall for a Second Day
Gold fell in London for a second day as a rally in the dollar eroded the appeal of the precious metals as an alternative asset. Silver was little changed. Published on 2008-08-25

Crude Oil Falls on Stronger Dollar
Crude oil fell for the first time in four days as the U.S. dollar strengthened and Turkey restored flows through a Caspian Sea pipeline.Published on 2008-08-22

Oil Gains a Third Day
Oil rose on speculation that Russian crude may be disrupted because of rising tensions with the U.S., and as the weaker dollar bolstered the hedging appeal of commodities. Published on 2008-08-21

Oil Rises a Second Day
Crude oil rose for a second day as a weakening dollar prompted investors to buy commodities as an inflation hedge. Published on 2008-08-19

Oil Declines
Crude oil fell, heading for a second weekly decline, as the stronger dollar diminished the appeal of commodities as an inflation hedge. Published on 2008-08-15

Gold Slumps Below $800
Gold fell below $800 a troy ounce for the first time this year on Friday as the recent sell-off in the commodities sector gathered pace and the dollar hit fresh highs.Published on 2008-08-15

Crude Oil Rises a Second Day
Crude oil rose for a second day after a U.S. Energy Department report yesterday showed a bigger- than-forecast decline in inventories of gasoline as refiners shut units and imports fell. Published on 2008-08-14

Oil Falls
Crude oil fell to a 14-week low on speculation that the dollar will strengthen against the euro, weakening the appeal of commodities as an inflation hedge. Published on 2008-08-12

Oil Falls for a Third Day
Crude oil fell for a third day on signs that a U.S. economic slump will extend into 2009, paring fuel demand in the world's biggest oil consumer. Published on 2008-08-12

Gold, Platinum, Silver Drop
Gold, platinum and silver plunged to their lowest in more than seven months as the dollar gained against the euro, reducing the appeal of precious metals as an alternative investment to U.S. denominated assets. Published on 2008-08-11

Crude Oil Falls to a 14-Week Low
Crude oil fell to a 14-week low on signs that the U.S. economic slump will extend into 2009, crimping fuel demand. Published on 2008-08-11

Gold Declines to Eight-Week Low
Gold dropped to an eight-week low in Asia, heading for a fourth weekly decline, as energy costs fell and the dollar rallied, reducing the precious metal's appeal as a haven investment. Published on 2008-08-07

Crude Oil Trades Near $119
Crude oil futures traded near $119 a barrel in New York after falling yesterday as U.S. supplies unexpectedly gained amid slowing demand, and the dollar climbed, reducing the appeal of commodities as an inflation hedge.Published on 2008-08-07

Crude Oil Falls a Third Day
Crude oil fell for a third day in New York, trading near $118 a barrel, on concern slowing economic growth in the U.S. and Europe will curb fuel consumption. Published on 2008-08-06

Crude Oil Falls to Three-Month Low
Crude oil fell to a three-month low as meteorologists forecast Tropical Storm Edouard will miss most offshore production facilities in the U.S. Gulf Coast while approaching Texas. Published on 2008-08-05

Oil Falls As Fears for Growth Intensify
Crude oil prices fell below $120 a barrel for the first time in three months on Monday amid mounting worries about slowing economic growth and signs of rising supplies from Opec, the oil exporting countries cartel.Published on 2008-08-04

Crude Oil Rises
Crude oil rose for a second day as a storm threatened U.S. output in the Gulf of Mexico, and Israeli and U.S. officials sought additional sanctions against Iran.
Published on 2008-08-04

Oil Rises
Crude oil rose more than $1 a barrel after the U.S. Energy Department reported an unexpected decline in gasoline inventories.
Published on 2008-07-30

Oil Drops on Stronger U.S. Dollar
Crude oil fell to a 14-week low as the U.S. dollar strengthened against the euro and on signs gasoline demand may extend declinPublished on 2008-07-29

Oil Trades Near 7-Week Low
Crude oil traded near a seven-week low in New York after falling as the Organization of Petroleum Exporting Countries and China raise output.
Published on 2008-07-28

Gold, Silver Fall as Dollar Gain
Gold fell for a third straight day as the dollar rose to a two-week high against the euro, eroding the appeal of the precious metal as an alternative investment. Silver also fell. Published on 2008-07-24

Oil Falls Below $125
Crude oil futures fell below $125 a barrel for the first time in seven weeks after a U.S. government report showed that fuel stockpiles increased as consumption tumbled to the lowest in more than a year. Published on 2008-07-23

Crude Oil Falls
Crude oil fell for a second day in New York after forecasters expect Hurricane Dolly to miss fields in the Gulf of Mexico and the dollar rebounded, curbing investments in commodities. Published on 2008-07-23

Crude Oil Falls
Crude oil fell in New York as Tropical Storm Dolly is unlikely to affect oil and natural gas operations in the Gulf of Mexico while heading toward the coast of Texas. Published on 2008-07-21

Oil Trades Near $135
Crude oil traded little changed near $135 a barrel in New York after falling almost 3 percent yesterday as U.S. inventories increased unexpectedly. Published on 2008-07-17

Gold Rises
Gold gained in Asia, after tumbling the most in more than three weeks yesterday, as investors sought a haven on concern the dollar may decline and inflation increase.
Published on 2008-07-16

Oil Falls Most in 3 Years
Crude oil tumbled the most in three years on concern that a slower U.S. economy will curtail demand for oil and gasoline. Published on 2008-07-15

Crude Oil Pares Losses
Crude oil pared losses of almost 2 percent in New York as a five-day strike by Brazilian workers threatened to cut the nation's daily output by more than half.
Published on 2008-07-14

Crude Oil Jumps More Than $5
Crude oil rose more than $5 a barrel in the last hour of New York floor trading as prices breached a level that triggered computer-generated buying programs. Published on 2008-07-10

Oil Falls
Crude oil fell for a second day as signs that the global economy may slow further prompted investors to sell commodities. Published on 2008-07-08

Oil Is Steady After $3 Drop on Dollar
Crude oil was little changed in New York after falling more than $3 a barrel yesterday amid short- lived gains in the dollar and signs economic growth is slowing across Europe, which may curtail energy demand. Published on 2008-07-07

Crude Oil Rises
Oil rose, extending this year's 48 percent gain, after ABC News reported Israel is increasingly likely to attack Iran this year, starting a conflict that would threaten supplies from the Middle East. Published on 2008-07-01

Gold Gains as Dollar May Fall
Gold advanced in Asia on expectation the U.S. dollar may fall before an industry report today that will show U.S. manufacturing shrank, boosting the appeal of the precious meal as an alternative asset. Published on 2008-07-01

Oil Rises to Record
Crude oil rose to a record above $143 a barrel on speculation the dispute over Iran's nuclear program may disrupt supply from OPEC's second-largest producer. Published on 2008-06-30

Oil Is Little Changed
Crude oil was little changed in New York near $140 a barrel after falling as traders sold contracts to lock-in profits from yesterday's gain to a record. Published on 2008-06-27

Crude Oil Rises on Lower Dollar
Crude oil rose more than $3 a barrel as a lower U.S. dollar spurred investors to purchase commodities as a hedge and Libya said it may cut production.
Published on 2008-06-26

Gold Gains in London on Dollar Weakness
Gold advanced in London after the dollar fell to the lowest in more than two weeks against the euro, buoying demand for the precious metal as an alternative investment to the U.S. currency. Published on 2008-06-26

Oil Drops More Than $4
Crude oil fell more than $4 a barrel after a U.S. government report showed that inventories rose for the first time in six weeks. Published on 2008-06-25

Oil Rises as U.S. Dollar Drops
Crude oil rose for a third day as the U.S. dollar dropped, enhancing the appeal of commodities as an inflation hedge, and a labor strike threatened to deepen production losses in Nigeria. Published on 2008-06-24

Oil Rises
Crude oil rose on signs that Saudi Arabia's output increase may not raise global supply enough to make up for production disruptions in Nigeria. Published on 2008-06-23

Euro Falls Most Versus Dollar in Week
The euro dropped the most versus the dollar in more than a week as German business confidence fell in June to the lowest level since 2005, reducing speculation the European Central Bank will increase interest rates this year. Published on 2008-06-23

Oil Is Little Changed on Saudi Production
Crude oil was little changed after falling in New York as Saudi Arabia pledged to increase production and militants in Nigeria called a cease-fire in their attacks on oil pipelines and vessels. Published on 2008-06-22

Crude Oil Rises
Crude oil rose as the weaker dollar enhanced the appeal of commodities as a currency hedge and the New York Times reported that Israel held a rehearsal for a potential bombing attack on nuclear targets in Iran. Published on 2008-06-20

Oil Falls More Than $4
Crude oil fell more than $4 a barrel, the biggest drop in 11 weeks, on speculation demand will decline, after China said it will raise fuel prices starting tomorrow. Published on 2008-06-19

Oil Falls for Fourth Day
Crude oil fell for a fourth day in New York on signs that gasoline demand in the U.S., the world's largest consumer, is declining as record prices curb usage. Published on 2008-06-17

Crude Oil Drops for a Third Day
Crude oil declined for a third day amid concerns that slower economic growth will curb consumption of oil products. Published on 2008-06-17

Gold Holds Above $880
Gold held gains above $880 an ounce in Asia after a jump in crude oil and a decline in the dollar boosted the appeal of the precious metal as hedge against inflation and alternative investment. Published on 2008-06-11

Gold Falls Most in Two Months as Dollar Jumps
Gold tumbled the most in two months as the dollar had the biggest gain since December, reducing the appeal of the precious metal as an alternative investment. Silver also dropped.Published on 2008-06-10

How Oil Prices Affect Consumer Spending
The price of oil has doubled over the last 12 months reaching almost $140 per barrel last week. How this boom in oil prices may affect global economy and consumer spending?Published on 2008-06-10

Oil Falls More Than $4
Crude oil fell more than $4 a barrel in New York after Saudi Arabia's oil minister, Ali al-Naimi, called for a meeting of oil producing and consuming nations to discuss how to deal with record prices. Published on 2008-06-09

Oil Rises to Record on Weakening Dollar
Crude oil rose more than $10 to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month. Published on 2008-06-06

Crude Oil Rises More Than $5
Crude oil rose more than $5 a barrel as the dollar dropped against the euro on statements that the European Central Bank may boost interest rates to cut inflation. Published on 2008-06-05

Gold Falls Most in Five Weeks
Gold tumbled the most in five weeks as the dollar rallied, reducing the appeal of the precious metal as an alternative investment. Silver also declined. Published on 2008-05-29

Gold, Silver Drop
Gold fell the most in four weeks as a drop in energy costs reduced demand for a hedge against inflation. Silver tumbled the most in two monthsPublished on 2008-05-27

Oil Trades Near One-Week Low
Crude oil traded near a one-week low in New York as U.S. consumer confidence dropped to the lowest level since October 1992, signaling a slowdown in the world's biggest oil user amid record energy prices. Published on 2008-05-27

Oil Falls More Than $2
Crude oil fell more than $2 a barrel in New York on signs that U.S. fuel consumption is dropping because of a slowing economy and record energy prices.
Published on 2008-05-27

Oil Rises Above $135
Crude oil rose to a record above $135 a barrel as OPEC ministers said they could do nothing to stop a rally that may be heading to $200 a barrel. Published on 2008-05-22

Gold Rallies on Weak Dollar
Gold rose to the highest in a month as surging oil prices and a weakening dollar boosted demand for the metal as a hedge against inflation. Silver also gained. Published on 2008-05-21

Oil Rises Above $134 on U.S. Supply Drop
Crude oil rose to a record above $134 a barrel as U.S. stockpiles unexpectedly dropped and banks raised price forecasts because of supply constraints and demand growth. Published on 2008-05-21

Oil Rises to a Record
Crude oil rose above $128 a barrel in New York for the first time after billionaire hedge-fund manager Boone Pickens said that oil will reach $150 a barrel this year.
Published on 2008-05-20

Oil rallies to new high near $128
Oil shot to a record high near $128 on Friday after Goldman Sachs, the most active investment bank in energy markets, raised sharply its forecast for prices.Published on 2008-05-16

Is Oil as Expensive as it Seems?
The price of oil has doubled over the last 12 months reaching over $122 per barrel on May 6. What have caused that drastic increase and is it really a new record?Published on 2008-04-29

Oil Rises to Record
Crude oil rose to a record after BP Plc shut a North Sea pipeline and gunmen attacked police guarding Nigeria's largest oil and gas terminal. Published on 2008-04-27

Crude Oil Falls as Dollar Strengthens
Crude oil fell for a second day in New York after the dollar rose against the euro, reducing the appeal of commodities to investors, and a government report yesterday showed U.S. stockpiles increased more than expected. Published on 2008-04-24

Oil Rises to Record Above $118
Crude oil rose to a record above $118 a barrel on concern that a labor dispute in the U.K. and disruptions in Nigeria may crimp oil supply. Published on 2008-04-22

Oil Soars to Record above $117
Crude oil prices surged above $117, setting a new record high on Monday because of worries of supply disruptions from major producers and comments by OPEC reiterating there is no need to raise output.Published on 2008-04-21

Oil Rises to Record Above $113
Crude oil rose to a record above $113 a barrel in New York on supply disruptions in Nigeria and Mexico and rising fuel demand in China.
Published on 2008-04-15

Oil Bounces on Supply Disruptions
Oil prices jumped on Monday because of a U.S. pipeline shutdown and some production losses in Nigeria following a fire at a flow station.Published on 2008-04-14

Oil Falls a Second Day
Crude oil fell for a second day in New York on signs that high prices and a slowing economy will curb U.S. fuel consumption. Published on 2008-04-11

Oil Climbs More
Oil jumped nearly $3 a barrel on Monday, lifted by a rally in gas oil and as optimism that banks will manage to shore up the financial system helped to fuel buying across commodities and equities.Published on 2008-04-07

Why Gold is Soaring?
During the last two years the price of gold doubled, reaching $1,000 per ounce on March 13th. What has caused that huge increase in the value of the yellow metal?Published on 2008-04-01

Oil Falls More Than $4
Crude oil fell more than $4 a barrel in New York on signs that slowing economic growth in the U.S. will bolster stockpiles and curb demand. Published on 2008-03-31

Oil Near $106
Oil jumped above $107 on Thursday after saboteurs blew up one of Iraq's two main export pipelines.Published on 2008-03-27

Oil Falls a Third Day
Crude oil fell for a third day in New York on concern the slowing U.S. economy will cut consumption and the dollar's gain will reduce demand for commodities as a hedge against inflation. Published on 2008-03-24

Oil Drops below $100
Oil slipped below $100 a barrel on Thursday for the first time in two weeks, extending a hefty sell-off in the previous session on growing concerns an economic slowdown in top consumer the United States would undermine global energy demand.Published on 2008-03-20

Gold Falls Most Since June 2006
Gold plunged the most since June 2006, leading a decline in commodity prices, on speculation the slump in the dollar will end as the Federal Reserve eases the pace of interest-rate reductions.
Published on 2008-03-19

Oil falls below $105
Oil dived on Wednesday as signs of falling demand and concerns about the impact of a U.S.-led recession offset the impact of lower than expected U.S. fuel inventories.Published on 2008-03-19

Oil Rises to Record
Crude oil rose to a record in New York as a sliding dollar and credit market losses in the U.S. prompted investors to buy commodities. Published on 2008-03-17

Oil Slips below $110
Oil slipped below $110 on Friday as investors took profits after prices hit a record $111 in the previous session, but the depressed dollar was seen limiting losses.Published on 2008-03-14

Oil Roars to Record Over $108
Oil shot to a record over $108 a barrel on Monday, extending a rally led by investors seeking a hedge against the tumbling dollar and inflation.
Published on 2008-03-10

Oil Falls Below $105
Oil fell below $105 a barrel on Monday as investors cashed in on last week's rally to record highs that was stoked by a depressed U.S. dollar and fund flows into commodities.Published on 2008-03-10

Oil Rises Above $104
Crude oil rose above $104 a barrel for the first time in New York after OPEC gave no indication it will increase production, U.S. fuel inventories declined and Venezuela sent tanks to its border with Colombia.
Published on 2008-03-05

Oil Hits New Peak
Oil vaulted more than 3 percent a barrel on Thursday to an all-time peak near $103, eclipsing the previous inflation-adjusted high set 28 years ago, after a fire hit a major European natural gas terminal and the U.S. dollar fell to a record low.
Published on 2008-02-28

Oil Trades Near Record as U.S. Dollar Falls
Crude oil traded near a record in New York as the U.S. dollar dropped to an all-time low against the euro and investors pumped funds into the market to reap returns from rising commodities. Published on 2008-02-26

Gold Futures Rise to Record $958.40
Gold futures surged to a record $958.40 an ounce as a slumping dollar and soaring commodity costs boosted the appeal of the precious metal as an inflation hedge. Published on 2008-02-21

Crude Oil Rises
Crude oil rose in New York on speculation global demand will continue to grow after prices reached a record. Published on 2008-02-21

Gold Trades Near Three-Week High
Gold was little changed near a three- week high in Asia as a rise in crude oil and a weakening U.S. dollar boosted the appeal of bullion as a hedge against accelerating consumer prices. Published on 2008-02-19

Oil Falls From Record $100.10
Crude oil fell from a record $100.10 a barrel in New York on speculation that a U.S. Energy Department report will show stockpiles rose for a sixth week. Published on 2008-02-19

Oil Rises above $93
Oil rose above $93 a barrel on Wednesday as concerns over Venezuela's move to halt shipments to U.S. major Exxon Mobil offset expectations for a build in crude stocks in the world's largest consumer.Published on 2008-02-13

Oil Pares Losses
Oil recouped some of its losses on Monday to move back towards $89 a barrel, after suffering a sharp downturn the previous session, pressured by fears over a possible U.S. economic recession.Published on 2008-02-04